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Growth Projections: Altra Industrial reported off better-than-expected results in the three of the last four quarters, with an average positive earnings surprise of 5.06%. Notably, the company’s earnings in the first quarter of 2018 came in at 66 cents, topping the Zacks Consensus Estimate of 61 cents by 8.20%. Currently, the consensus estimate is pegged at 66 cents for second-quarter 2018, $2.47 for 2018 and $2.70 for 2019, representing year-over-year growth of 15.8%, 20.5% and 9.3%, respectively.

In 2018, Altra Industrial anticipates gaining from solid bookings in the majority of the end markets, acquired assets and healthy industrial economy. It anticipates sales to come within the $910-$930 million range, higher the previous forecast of $895-$915 million and $877 million generated in 2017. Non-GAAP earnings are expected to be $2.36-$2.49 per share, up from $2.30-$2.43 expected earlier and $2.05 earned in 2017.

Over the long run, Altra Industrial anticipates revenue growth to be in excess of the GDP while it aims to improve its operating margin by 150 basis points (bps) on strategic pricing.

Strategic Initiatives: Altra Industrial has been working on certain restructuring and cost-saving initiatives to keep costs under control and align its business operations with the current demand levels. Over the long term, the company intends to lower the number of its facilities by 20-30%, and improve its supply chain worldwide.

Strengthening Portfolio Through Acquisitions: Over time, acquired assets have played an important role in expanding Altra Industrial’s business. For instance, Stromag (acquired in December 2016) has expanded the company’s product offering for various end-markets through its clutches and brakes, flexible couplings, limit switches and friction discs. Also, the company’s business combination with Automation and Specialty business of Fortive Corporation (FTV - Free Report) , when completed, will create a global leader in motion control and power transmission. The combined business will have revenues of approximately $1.8 billion. Earnings per share accretion is anticipated immediately.

Factors Working Against Altra Industrial

Wind Market Weakness, Share Price Performance: Downturn in one or more markets served — mining, wind, construction, general industrial, aerospace and water infrastructure — by Altra Industrial will have an adverse impact on its financials. For instance, double-digits fall in the sales generated from the wind business affected the company’s top-line performance in first-quarter 2018. Weakness in the wind business also had more than 80 bps adverse impact on operating margin.

Year to date, the company’s shares have lost 14.2%, wider than 9.9% fall of the industry.

Adversities Arising From Rising Costs: Altra Industrial is dealing with adverse impact of rising cost of sales. Notably, the company’s cost of sales in the last five years (2013-2017) jumped 18.6% while its selling, general and administrative expenses increased 26.4% and research and development expenses surged 95%. Notably, in first-quarter 2018, the company’s cost of sales increased 11.3% from the year-ago period while selling, general and administrative expenses jumped 16.7%. We believe that unwarranted rise in costs and expenses will prove detrimental to the company’s margins and profitability.

Weak Cash Position: Altra Industrial’s cash position has weakened in the last five years (2013-2017). Its cash and cash equivalents have declined 18.8% over the period while its cash ratio has fallen from 0.45 in 2013 to 0.36 in 2017. Notably, the company’s cash and cash equivalents decreased 10.8% sequentially in the first quarter of 2018, with its cash ration slipped to 0.32. Cash ratio below 1 indicates the company’s inability to pay off its short-term liabilities while a falling ratio seems to be worsening the situation.

In the last 60 days, earnings estimates for both the stocks have improved for the current year. Also, average positive earnings surprise for the last four quarters was 250.43% for Twin Disc and 15.50% for Kadant.

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